RISK ASSESSMENT

Slowdown in activity after a peak

Growth will slow in 2019, reflecting business investment, which is set to be considerably less vibrant after being driven in 2018 by President Donald Trump's tax reforms (corporate tax cut from 35% to 21%). In addition, business profit margins will continue to be affected by increased input costs in connection with the customs duties imposed on a wide range of products, including steel and aluminium. Credit will also become more expensive due to the continued tightening of monetary policy, with the FED planning to continue to raise its key interest rate in 2019, after hiking it from 1.5% to 2.5% in 2018. Despite these headwinds, household consumption should show resilience, thanks to the ongoing decline in the unemployment rate (3.7% in October 2018, the lowest in five decades) and the significant acceleration in real wages. As military spending surges in 2019 (USD 80 billion increase, or 0.4% of GDP), public consumption will contribute more to growth. Conversely, the business environment will be much less favourable (slowdown in the main partner economies, protectionist reprisals by those same partners).

Despite the signing of the USMCA trade deal (renegotiated NAFTA), exports – which have become less competitive due to upward pressure on the dollar caused by the FED's monetary tightening – will slow significantly. As imports decelerate more slowly – despite protectionist measures, due to resilient household consumption –, foreign trade will weigh more heavily on growth.

The automotive and construction sectors are expected to be particularly affected on the demand side by dearer credit and on the supply side by rising metal input costs. Meanwhile, the energy sector will continue to be driven by high oil prices.

Deterioration in the public and external accounts

The substantial government deficit is expected to widen further in 2019. While it increased sharply in 2018 with President Trump's tax reforms (USD 1.4 trillion in tax cuts over ten years, or about 0.7% of GDP per year), the deficit will continue to deteriorate, despite the strong economy, due to the sharp rise in expenditure, especially military spending. Subject to agreement with the Democrats in the House of Representatives, a USD 200 billion (0.9% of GDP) infrastructure investment plan (according to the first version presented by President Trump) could further increase the government deficit. As a result, US public debt, which is among the highest in the world, will remain on an upward trend.

Substantial imports of consumer and capital goods have led to a chronic deficit in the goods balance, which is only partially offset by the surpluses in services and income (dividends from US investments abroad exceed remittances from investors and foreign workers). Despite the implementation of protectionist measures and the continued trade war with China (customs duties of 10% on USD 200 billion of Chinese imports until March 2019, then potential increase to 25%), the current account deficit is expected to widen in 2019. With the deficit being financed by FDI and portfolio investment, the US net external position is structurally in deficit (42% of GDP at the end of June 2018).

Democrats regain control of the House of Representatives

Following the mid-term elections of November 2018, the Democrats regained the House of Representatives, taking 235 seats out of 435. Accordingly, any major new reform (health insurance, Mexican border, immigration, taxation) – other than the infrastructure plan – will now be almost impossible, since President Trump depends on Democrat support. In addition, the Democrats will be able to launch House investigations, for instance into Russian influence on the 2016 elections or President Trump's tax returns. However, the Republicans held onto the Senate, with 53 seats out of 100, and hence the important power to approve appointments of senior officials and Supreme Court judges. While the Democrats now have the power to launch proceedings to impeach President Trump, an impeachment would have very little chance of succeeding, because it would need a two-thirds majority in the Senate. President Trump will still be able to amend existing law by executive order, particularly in trade and foreign policy. Therefore, while his domestic policy is likely to be deeply affected by the new configuration, President Trump will probably stick to the same line in international policy.

Last update : February 2019

Payment

Exporters should pay close attention to sales contract clauses on the respective obligations of the parties and determine payment terms best suited to the context, particularly where credit payment obligations are involved. In this regard, cheques and bills of exchange are very basic payment devices that do not allow creditors to bring actions for recovery in respect of “exchange law” (droit cambiaire) as is possible in other signatory countries of the 1930 and 1931 Geneva Conventions on uniform legal treatment of bills of exchange and cheques.

Cheques are widely used but, as they are not required to be covered at their issue, offer relatively limited guarantees. Account holders may stop payment on a cheque by submitting a written request to the bank within 14 days of the cheque’s issue. Moreover, in the event of default, payees must still provide proof of claim. Certified checks offer greater security to suppliers, as the bank certifying the cheque thereby confirms the presence of sufficient funds in the account and makes a commitment to pay it. Although more difficult to obtain and therefore less commonplace, cashier’s checks – cheques drawn directly on a bank’s own account – provide complete security as they constitute a direct undertaking to pay from the bank.

Bills of exchange and promissory notes are less commonly used and offer no specific proof of debt. The open account system is only justified after a continuing business relationship has been established.

Transfers are used frequently – especially via the SWIFT electronic network, to which most American banks are connected, and which provides speedy and low-cost processing of international payments. SWIFT transfers are particularly suitable where real trust exists between the contracting parties, since the seller is dependent on the buyer acting in good faith and effectively initiating the transfer order.

For large amounts, major American companies also use two other highly automated interbank transfer systems – the Clearing House Interbank Payments System (CHIPS), operated by private financial institutions, and the Fedwire Funds Service System, operated by the Federal Reserve.

Debt collection

Amicable phase

Since the American legal system is complex and costly (especially regarding lawyers’ fees), it is advisable to negotiate and settle out of court with customers wherever possible, or otherwise hire a collection agency.

Legal proceedings

The judicial system comprises two basic types of court: the federal District Courts with at least one such court in each state and the Circuit or County Courts under the jurisdiction of each state.

Fast-track proceedings

If the debt is certain and undisputed, US law provides for a “summary judgment” procedure, where a motion for summary judgment is based upon a claim by one party that all necessary factual issues are settled or that no trial is necessary. This is appropriate when the court determines there are no factual issues remaining to be tried, and therefore a cause of action or all causes of action in the complaint can be decided without a trial. If the judge decides that there are facts in dispute, the court will deny the motion for summary judgment and order a trial.

Ordinary proceedings

The vast majority of proceedings are heard by state courts, which apply state and federal law to disputes falling within their jurisdictions (i.e. legal actions concerning persons domiciled or resident in the state).

Federal courts, on the other hand, rule on disputes involving state governments, cases involving interpretations of the constitution or federal treaties, and claims above USD 75,000 between citizens of different American states or between an American citizen and a foreign national or foreign state body or, in some cases, between plaintiffs and defendants from foreign countries.

A key feature of the American judicial system is the pre-trial “discovery” phase, whereby each party may demand evidence and testimonies relating to the dispute from the adversary before the court hears the case. During the trial itself, judges give plaintiffs and their lawyers a considerable leeway to produce pertinent documents at any time and conduct the trial in general. This is an adversarial procedure, where the judge has more the role of an arbitrator, ensuring compliance with the procedural rules, although more and more practices enhances the role of the judge in the running of the case. The discovery phase can last several months, even years. It can entail high costs due to each adversary’s insistence on constantly providing pertinent evidence (argued by each party), and involve various means – such as investigations, requests for supporting documents, witness testimony, and detective reports – which are then submitted for court approval during the final phase of the proceedings.

In civil cases, the jury determines whether the demand is justified and also determines the penalty to impose on the offender. For especially complex, lengthy, or expensive litigations, such as insolvency cases, courts have been known to allow creditors to hold as liable the professionals (e.g. auditors) who have counselled the defaulting party, where such advisors have demonstrably acted improperly.

Enforcement of a Legal Decision

Domestic judgments in the United States give the creditors additional rights, such as the seizure and selling of the debtor’s assets or the garnishment of their bank account. As a federal state, decisions rendered in one of the country’s states may be executed in another state’s court, provided that the enforcing court considers that it is competent to enforce any judgement.

For foreign awards, each state has its own legislation. Nevertheless, they must be first recognised as domestic judgments. If a reciprocal recognition treaty exists, the requirement is fulfilled. However, in the absence of one, exequatur proceedings aim at ensuring enforcement in domestic court, after verifying the judgment meets certain criteria provided by the state law.

Insolvency Proceedings

Out-of court proceedings

Different state laws can propose out-of court proceedings in order to avoid any formal judicial proceedings, such as the Assignment for the benefit of creditors in the state of California, where a company turns over all of its assets to an independent third party, who liquidates and distributes them to all creditors in an equitable fashion.

Restructuring proceedings

Chapter 11 of the American Bankruptcy Code provides a distressed entity with the opportunity to preserve its business as a going concern while implementing an operation of financial restructuring. The debtor can seek to adjust its debt by reduction the amount owed or extending repayment terms. The debtor entity and its management continue to operate the business as the debtor-in-possession. The Bankruptcy Court supervises the proceedings.

Liquidation

According to Chapter 7 of the American Bankruptcy Code, the purpose of these proceedings is to implement an orderly liquidation of the distressed entity. The court-supervised process involves a trustee selling assets and distributing the proceeds to creditors in accordance with the statutory priorities provided in the Bankruptcy Code as well as pursuing available causes of action. The US Trustee appoints an independent interim trustee to administer the case. The interim trustee holds a meeting of creditors after the petition is filed. He is responsible for liquidating the estate’s assets and distributing the proceeds to the creditors. The court supervises the proceedings. State law can also provide different mechanism for liquidation of a debtor’s assets such as receivership.